SIA Engineering Co. Ltd: Fighting the G-Force

SIA Engineering Co. Ltd (SIAEC) delivered robust results for its third quarter FY25, with revenue and net profit growing by 11.3% and an impressive 42% year-on-year (YoY), respectively. The company met OCBC’s expectations, showcasing its resilience amidst industry challenges. Key highlights include:

• Revenue Performance: Quarterly revenue surged to SGD324.8 million, driven by an 8.4% YoY increase in flights handled. December 2024 alone saw flight numbers surpass pre-COVID-19 levels.
• Operational Efficiency: Despite a decline in the number of aircraft checks YoY (156 light and 20 heavy checks compared to 199 light and 24 heavy in 3QFY24), the company handled checks with heavier work content, extending hangar stays due to ongoing supply chain issues.
• Profitability: Operating profit stood at SGD4.7 million, reversing a loss of SGD3.4 million in 3QFY24, while associated and joint ventures contributed SGD32.2 million, up 35.3% YoY.
• Challenges: Supply chain constraints and manpower shortages remain headwinds, but the company is progressively implementing its new Enterprise Operating System to enhance resilience.

OCBC revised its fair value (FV) estimate to SGD2.64, trimming it from SGD2.76, citing higher risk-free rates and beta adjustments. The recommendation remains a BUY, supported by the constructive outlook for the Maintenance, Repair, and Overhaul (MRO) industry.

Palm Oil Sector: No Rainbow Without the Rain

The palm oil sector continues to exhibit firm price trends in 2025, supported by biodiesel mandates and rising global edible oil consumption. However, challenges persist, including:

• Price Competition: Rival oils, which are cheaper, may cap crude palm oil (CPO) price upside.
• Downside Risks: Weaker-than-expected demand from major markets like China and India, adverse weather conditions, and unfavorable policy changes could dampen growth.

Long-term fundamentals remain positive, with robust demand and decelerating yields favoring supply-demand dynamics. OCBC highlighted pure upstream players with industry-leading productivity as preferred investments, maintaining a pecking order of:

1. Bumitama Agri Ltd (most preferred)
2. Golden Agri Resources
3. Wilmar International (least preferred)

Bumitama Agri has outperformed peers, delivering a 44% return since its recommendation, and is expected to continue providing trading opportunities into 1Q25 and early 2Q25.

Singapore REITs: Growth Remains Elusive

The Singapore REITs (S-REITs) sector has underperformed both in 2024 and year-to-date (YTD) in 2025. Key factors influencing this trend include:

• Muted Earnings: Eight out of 16 S-REITs under OCBC’s coverage reported YoY declines in Distribution Per Unit (DPU) for 4Q24, while seven posted increases and one remained flat.
• Flat DPU Growth Forecasts: Median DPU growth for FY25 is expected to rise by just 0.6%, with a projected recovery of 4.3% in FY26 due to higher interest rates and currency depreciation.
• Valuation Metrics: The iEdge S-REIT Index is trading at a forward Price-to-Book (P/B) ratio of 0.81x, significantly below its 8-year average of 0.98x, and a forward distribution yield of 6.8%, which is 1.5 standard deviations above the 8-year average.

Despite the challenges, OCBC sees selective opportunities in high-quality names with strong sponsors. Top picks include:

• CapitaLand Ascendas REIT (CLAR) – FV: SGD3.30
• CapitaLand Integrated Commercial Trust (CICT) – FV: SGD2.35
• Keppel DC REIT (KDCREIT) – FV: SGD2.43
• Parkway Life REIT (PREIT) – FV: SGD4.60

Frasers Logistics & Commercial Trust (FLT) and CapitaLand Ascott Trust (CLAS) were removed from the preferred list, though their BUY ratings remain intact.

China Strategy: Innovation Powerhouses Lead the Way

Offshore Chinese equities saw a significant rebound last week, with the MSCI China Index rising 7.1%, driven by artificial intelligence (AI) momentum. Key drivers include:

• AI Adoption: Launches like DeepSeek and Alibaba’s Qwen2.5 highlight China tech’s ability to innovate despite hardware limitations. These models offer lower training costs and more efficient methods, accelerating AI adoption.
• Sector Performance: Communication services, consumer discretionary (led by internet and platform companies), and IT were the best-performing sectors. The Hang Seng Tech Index mirrored this trend with a 7.3% surge.
• Liquidity Inflows: Southbound Stock Connect contributed USD20 billion YTD, heavily skewed toward AI-related industries.

Companies like Tencent and Alibaba are leveraging AI to boost operational efficiency. Tencent’s ad-tech upgrades increased click-through rates, driving ad revenue growth by 18% YoY in 2024, while Alibaba’s site-wide marketing tools lower entry barriers for merchants.

However, risks loom in the form of US-China tensions and tariff disputes, with the US tariff review due by April 2025. Investors are advised to adopt a barbell strategy, balancing defensive yields with upside optionality in internet and platform companies. Despite near-term overvaluation risks, OCBC remains optimistic about AI adoption driving structural growth.